The Canadian government’s plan to put in place a tax on digital services has prompted the United States to call it “discriminatory,” sparking a diplomatic row between the two countries.
The tax is a three percent levy aimed at foreign companies—many of which are based in the U.S.—that receive revenue from Canadian subscribers and contributors. It will take effect in January 2024 and is retroactive to the beginning of 2022.
The measure was put in place as a failsafe of sorts to backstop a collective effort by G20 countries and the Organization for Economic Co-operation and Development (OECD) to create their own global digital taxation framework. All the nations are expected to implement a universal tax framework by the year 2024, which would establish a global minimum corporate tax rate of 15 percent.
The Office of the Parliamentary Budget Officer has claimed the implementation of the digital services tax would raise $7.2 billion in the next five years.
But while the Canadian government had agreed to a two-year deferral period in 2021 to implement that tax, it has now said it will not go along with the delay. Ottawa has argued that delaying the implementation of the international agreement by another year would put Canada at a disadvantage when compared to countries that have been collecting revenue under their pre-existing digital services taxes.
The United States has taken issue with Canada’s refusal to delay the proposed tax, as it had aimed to establish a unified approach for a minimum tax level that would prevent multinational companies from exploiting tax rules through aggressive tax planning strategies.
U.S. Ambassador to Canada David Cohen recently warned at a luncheon speech hosted by the Canadian Club of Ottawa that there will be “contention” unless the dispute is resolved.
“There’s a place where we’re either going to have to have agreement, or we’re going to have a big fight,” he said of the tax.
The ambassador added that while the U.S. understood Canada’s position, it wanted more time for the OECD framework to come into action. He said a “country-by-country” approach where America was disproportionally impacted would not be fair.
“The United States thinks digital services taxes are discriminatory against United States companies. What the United States has asked... is for an additional year or two to try and put the OECD framework in place,” he said.
Two U.S. senators on the Senate Committee on Finance have also written a letter calling for retaliation if Canada moved forward with the tax plan which, they argued, would impact the nearly eight million U.S. workers employed in the digital economy.
“We must not allow foreign governments to target U.S. companies and the Americans they employ simply because their hard work and innovation have led them to become global leaders in this critical sector,” said Sens. Ron Wyden and Michael Crapo.
In September, members of the U.S. House Committee on Ways and Means, which oversees matters of international trade, wrote there would be “significant consequences” if Canada proceeded with the tax. The letter was addressed to Treasury Secretary Janet Yellen and U.S. Trade Representative Katherine Tai, and was co-signed by 41 committee members from both sides of the aisle.
The letter also questioned whether the tax would constitute a violation of Canada’s obligations under the U.S.-Mexico-Canada Agreement, and noted that the majority of OECD countries had agreed to extend their own timeline to the end of 2024.
Prime Minister Justin Trudeau and U.S. President Joe Biden will discuss the matter on Nov. 3 when Mr. Trudeau travels to the U.S. capital to take part in a mini-summit on trade and irregular migration.
